Implications of New Build Back Better Plan
The Build Back Better Plan (the “Plan”) has changed several times over the past few months, but the latest iteration is discussed herein. The Plan will increase tax revenue, but revenues will fall far short of expenditures under the plan. An increase in IRS funding and expanded IRS enforcement is included as a revenue raiser. The increase in audits and adjustments to taxpayer’s returns are estimated to significantly increase revenue.
It is estimated that the largest expenditures will be for child care and prekindergarten. The second costliest provision is the expanded state and local tax deduction for high-income individuals. This will cost $285 billion dollars and is unpaid for under the current scenario. Higher tax rates on high-income individuals will be more than offset by the increased deduction for state and local taxes. Therefore, the top 1 percent of income earners would actually benefit from the Plan.
Unfortunately, all other income groups will have less after-tax income in the long-run from this latest proposal. This is in part due the child tax credit provisions only being for one year. If this provision is extended beyond one year, then the benefit to the lower 40% of income-earners changes significantly for the better. As it stands now, the rich gain more from expanded deductions than lower-income individuals benefit from all other elements of the bill, including the child tax credit. The high-income individuals that benefit from the Plan predominately live on the west and east coasts of the country.
The major tax provisions of the Plan on individuals are as follows: a) New tax on income in excess of $10 million of 5% and 3% in excess of $25 million; b) Expanded child tax credits and earned income tax credits extended through 2022; c) Limitation on IRA contributions; d) State and Local tax deduction raised from $10,000 to $80,000.; e) Net Investment tax of 3.8% would apply to pass-through income for pass-through entities.
The major tax provisions of the Plan on Corporations is as follows: a) New 15% tax on corporate book income for corporations with profits over $1 billion; b) New 1% tax on the value of stock purchases; c) Changes to the international tax system.
The economic impact of the Plan is a small reduction in Gross Domestic Product and the elimination of approximately 100,000 jobs and a small reduction in wages. The deficit will increase by $600 billion to $1 trillion plus. The extension of the child tax credit and/or other credits beyond 2022 would have a significant impact on these numbers.
